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Reinventing Gap
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August 14, 2001: 2:25 p.m. ET
With khakis out, Gap Inc. once again finds itself refocusing on new trends
By Staff Writer John Chartier
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NEW YORK (CNNfn) - For 30 years, Americans' closets have been filled with basics from Gap Inc. Its khakis, pocket T-shirts and denim jeans are still a staple in many people's wardrobes.
But after a wildly successful decade in which it jumped all over "back-to-basics" and office casual trends, Gap (GPS: down $0.09 to $24.06, Research, Estimates) has hit a pothole.
People are looking for more than just basics now, which Gap specialized in, and the company has alienated its core customer by trying to appeal to everyone from teens to baby boomers.
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The Gap hopes denim will help revive sales this fall. | |
"They're past their prime. They cannot regain past glory. Twenty years ago they were unique. Now everybody's doing the same thing only at lower prices," said one analyst who asked not to be identified.
Last Thursday, the company, which annually accounts for about 3 percent of all U.S. apparel sales through its Gap, Old Navy and Banana Republic divisions, posted a 12 percent drop in sales at stores open at least a year, a key retailing gauge known as same-store sales.
The company also said it was cutting 1,300 jobs and taking a $30 million charge in the third quarter to pay for it.
"The stars aren't in alignment for these guys right now. They're really in the wrong place at the wrong time," said John Morris, a retail analyst at Gerard Klauer Mattison & Co.
Gap stock sank from a high of nearly $55 in February 2000 to just over $18 in November. Shares rebounded to about $35 in May and June, but have again slipped to their current $24 to $25 level.
The company is scheduled to report second-quarter results Thursday. Wall Street analysts expect its profit to be cut in half from year-ago levels to 11 cents a share, according to earnings tracker First Call. Fiscal 2002 profit is expected to come in at 93 cents a share, down from $1 a share in fiscal 2001.
Gap, under the leadership of popular CEO Millard "Mickey" Drexler, is counting on a denim revival to propel it through the back-to-school season, and investors are hoping he's right. Still, many are left scratching their heads and wondering just how things could have soured so quickly.
Throughout the 1980s, Gap was a juggernaut, consistently turning a profit in keeping with the lavish spending of the "me" generation. Gap, which has always had its core focus in basics, was then well-positioned for the 1990s, when consumers turned a bit more conservative, especially in light of the 1991 recession.
Shoppers began trimming back elaborate purchases and began stocking up on basics, T-shirts, khaki slacks and navy blue shirts.
As the economy soared, Gap broadened its horizons, getting away from its core 20- to 30-year old customer and marketing to wider age ranges, which worked well, since people had money to spend.
In the late 1990s, the company launched Old Navy, a value-priced store that offered fashion to everyone from infants on up. But the division struck a chord with teens by selling fleece, cargo pants and other items, and narrowed in on that market, again alienating its target audience.
Banana Republic, the company's upscale division, also began to broaden away from its niche.
"Initially, when they came out of the chute after the '91 recession, they hit a highly responsive chord with a public that was more focused on value," Donald Trott, an analyst at Jeffries & Co., said. "But even affluent people would go in and buy more goods."
But then the economy, and people's tastes, changed.
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The stars aren't in alignment for these guys right now. They're really in the wrong place at the wrong time
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John Morris
Retail analyst
Gerard Klauer Mattison & Co. |
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Between 1999 and 2001, the company's net income year-to-year plunged 31 percent, even though the amount of retail space increased by 50 percent, according to one analyst. The average size of the Gap's prototype store design jumped from 14,000 square feet in 1994 to 25,000 square feet in 2000.
"They just went completely bonkers on the expansion," Trott said.
In the late 1990s, consumers in their 20s and 30s who had been shopping at Gap for years suddenly felt too old when they walked in the door. And teen-agers discovered the fashion they were looking for at places like American Eagle Outfitters Inc. (AEOS: unchanged at $30.65, Research, Estimates), Bebe Stores Inc. (BEBE: up $0.76 to $34.82, Research, Estimates), and Limited Express (LTD: down $0.04 to $16.33, Research, Estimates), analysts said.
"What happens is anything that becomes too 'in' eventually becomes sort of 'out,' so you have Gap as a very stale, mature concept," Trott said.
The recent economic slowdown has also dampened store traffic and consumers' changing tastes.
With closets already full, consumers streamlined purchases to basics like food, or big-ticket items like refrigerators and cars that needed replacing, heading for the discount chains such as Wal-Mart (WMT: up $0.03 to $52.23, Research, Estimates), Kmart (KM: down $0.07 to $12.76, Research, Estimates), and Target (TGT: down $0.14 to $37.47, Research, Estimates).
Though the company struggled with steep markdowns during the traditionally slow summer season, it spent the lull constructively. Gap has now refocused on its core 20- to 30-year-old customer, and is pinning its hopes for the fall season on denim. Low riders, ultra-low riders, and skirts will cover the stores.
At its Old Navy division, which strives to be a value-priced store for the entire family, the company has offered more of a product mix for the fall, and moved its focus away from teens, which initially propelled its success.
Banana Republic, which caters to a more upscale consumer in his or her 20s, has also tightened the reins on fashion and on just who it's trying to lure into the stores. It is also streamlining costs by cutting back on expansion plans and reducing staff.
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"They're trying to add more of a faster fashion turn so the store has more freshness to it," Merrill Lynch analyst Mark Friedman said. "Certainly the size of the brand is definitely more mature than its competitors out there, but the Gap management team works hard to try and find ways to reinvigorate the brand."
With the stock price being knocked back a few notches, some analysts believe the company is poised for a rebound.
"Clearly they have gone back to their heritage. It displays the strength of this season, which is the denim business," CIBC World Markets retail analyst Dorothy Lakner said. "Much is made of a denim glut, but the fact is ... khaki was king. After three years of it, who needs another pair of tan pants?"
Investors likely will have the answer to that question by the end of the fall. 
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Gap Inc.
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